Refinancing a mortgage means you pay off an existing loan and replace it with a new one. There are several reasons why homeowners refinance: to get a lower interest rate, to shorten their mortgage term, to finance a large purchase using some of their home equity, or to consolidate debt.
Refinancing becomes popular when mortgage interest rates are low. But is it really a good idea to refinance? To decide whether refinancing is a wise financial decision for you, answer these three questions.
3 Questions to Ask Before You Decide to Refinance
What Will You Save by Refinancing?
There are two main reasons to refinance:
- To save on the total interest you’ll pay on your home in the long run
- To decrease your monthly mortgage payment
Refinancing can do both, but that doesn’t always happen. Let’s say you have 25 years left on a 30-year mortgage, and you refinance again for a 30-year term at a lower rate. You’ll get a lower monthly payment, but you could end up paying more interest in the long run because now it will take you 35 years to pay off your home.
However, if you have 25 years left on your loan and you refinance with a 15-year mortgage, your monthly payment may go up, but in the long run, you could pay thousands less in interest…and your home will be paid off 10 years sooner.
A mortgage broker or loan officer can show you the cost and potential savings of refinancing. Remember, it costs several thousand dollars to refinance because you have to pay a home appraisal fee as well as application and origination fees.
How Long Do You Plan to Keep Your Home?
It usually only makes sense to refinance if you plan on staying in your home for several more years. Don’t refinance if you plan on selling the property soon. In most cases, refinancing takes several months and even years to start saving you money. Your mortgage broker or loan officer can help you determine when you’ll break even.
Will You Qualify for Refinancing?
Even if it makes sense for you to refinance, you still need to qualify. Just because you have a home and pay your mortgage on time each month doesn’t mean you’ll be able to refinance your loan. Several factors determine your ability to refinance:
- Your income
- How much equity you have in your home
- Your credit
When you apply to refinance, there’s a whole new underwriting process. The bank will need to see that you earn enough to afford the monthly payment, that your property is worth more than the value of the loan, and that you are creditworthy. You can check your credit score for free here. If you’re behind on your current mortgage, it will be difficult to qualify for refinancing.
Although every situation is different, you might consider refinancing your mortgage if:
- You plan on staying in your home for another 5 years or so
- Current interest rates are at least 1% lower than your existing rate
- You feel confident you would be approved for the refinancing loan
Refinancing isn’t always the right choice. Call us today and let one of our experienced loan officers help you decide if it’s the best decision for you and your family.